OCTOBER 25, 2005

F1 and the Ukraine steel business

The news that Ukraine's largest steel mill has been bought by Mittal Steel for $4.8bn is interesting from a Formula 1 perspective as it gives a clear impression of the sort of money that the steel business can generate these days - and it begs the question of why Midland, a major Ukraine steel business, is not funding its F1 activities in a more active way. Steel is big business at the moment, with demand running high as China is developed. The Mittal purchase of the Kryvorizhstal mill comes after an earlier deal was annulled amid claims of corruption as the original sale involved the son-in-law of former President Leonid Kuchma and was worth only $800m.

That is expensive compared to what Alex Shnaider paid for the Zaporozhstal mill in 2001. The Midland boss acquired the majority shareholding in the former government-owned business for just $70m. The sale was later challenged by Tekt, a Kiev-based investment bank, which sued the government to try to stop the sale but this action and a subsequent appeal were thrown out.

Shnaider says that his acquitision of Zaporozhstal was entirely proper. With steel as the foundation, Shnaider has been investing heavily in eastern Europe, buying up a variety of other businesses, including recycling, warehousing and shipping companies, other metal mills, a plastics company, a meat-processing business, a bakery chain and a number of hotels. The firm is also involved in property development not least in league with the Moscow municipal government. Midland was the developer of the Arbat Business Center in Moscow and is now turning an old metal processing center in the Shabolovka district of the city into a housing development with condominium-style apartment blocks. The firm is also involved in a project to build a series of business, entertainment and shopping areas which are to bee built above the major intersections in the city. These aim to take people off the streets and thus help the traffic flow more easily. Shnaider is also involved in the funding of Trump Tower in Toronto.

A lot of these projects are making money and the mystery in F1 circles is why Midland bought the Jordan F1 team if he did not have plans to fund it properly. The team has struggled for cash this year and next year plans to take on two pay-drivers to help meet the bills in F1. Shnaider may be hoping that a big sponsor will come along and pay for the team but without results this is not likely to happen and the team looks set to slide backwards. This will become a serious problem if there is an 11th team next year as only the top 10 teams receive TV money, which amounts to around $15m a year. The threat of an 11th team was what convinced Paul Stoddart to sell Minardi to Red Bull. Shnaider, however, says he has no plans to sell his team, despite interest from Eddie Irvine and his backer Roustam Tariko, a Russian alcohol and banking baron.

It may be that Shnaider is waiting to sell Zaporozhstal as there appears to be much interest in the mill, notably from India's giant Tata Steel. With a few more billion dollars in the bank Shnaider will be able to expand his empire in the west and use the F1 team to promote his various businesses.